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My wife and I recently purchased a piece of waterfront property with a restaurant that has been neglected. The location is ideal, the price was right and we are desperate for a new project. We have been serial entrepreneurs and with some luck we have converted liabilities to assets and grown some equity along with our experience; we thought that acquiring the necessary debt financing for the project would be pretty easy.

I think bank robbers are more welcome by lenders than customers looking to finance restaurants. We visited 4 banks, got outright rejections from three, one of them the same bank that we have had a perfect and significant lending relationship with for 20 years, each rejection because we used the dirty word “restaurant”.

It gets worse. We contacted our economic development agencies, same response, “we don't touch restaurants”. Persistence led us to an aggressive bank, an SBA 7A guarantee was originally required but over the course of a few months we were able to demonstrate confidence that led to the bank dropping the requirement. Getting to a commitment meant a significant pledge of collateral – and a huge investment of time – to get to a closing on the require funds at a manageable rate.

When pressed for an explanation for the lack of interest the best answer we got was “we just don't lend to restaurants.” So I dug into it a bit to see what the failure rate really is. According to the National Restaurant Association 30% of new restaurants fail in the first year, and of those that survive, another 30% close in the next 2 years. Sure that is significant but according to the Small Business Administration’s Office Of Advocacy the two-year failure rate for all small businesses is 31%, and after five years the rate increases to 49%.

H.G. Parsa, a hospitality researcher, conducted an extensive study in 2005 looking at Department of Health records for over 2,400 restaurants and discovered that only one on four restaurants close or change hands in the first five years. Factors leading to failure are typical to all business sectors and include under capitalized, lack of experience and competitive landscape. In fact, as competitive density declines restaurant failure rates decline very rapidly – as low as 6% in the least crowded markets.

So what gives? Why are traditional lenders, and even worse economic developers, afraid to invest in a small business sector that has a lower failure rate than the average small business and leads to significantly higher employment? Perhaps it is based on the visibility of closure that comes with the high traffic sector. Perhaps it is because the demands on the owner/operator are extreme, often leading to the transfer of ownership even when the business is profitable – perceptions of lenders may be different. I think the real reason is simply “that’s the way it has always been.” New lenders are schooled by seasoned veterans to run from the industry because they had been told to years ago when they first started and the myth has been passed on.

Bottom line, if restaurant ownership is your dream be educated, find a way to gain some experience, build a strong team, find a terrific location and be persistent in your pursuit of a lender who hasn't bought into the system.